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Sterling falls below Friday's 31-year low amid Brexit uncertainty

Currency markets faced more upheaval on Monday, with traders raining new pain on Britain's pound and the yuan falling to a nearly six-year low against the dollar. This followed a weekend of contemplation after the Brexit vote, which failed to alleviate political and economic uncertainty.

Markets were surprised on Friday when it emerged Britain had voted to leave the European Union (EU), with the leave camp securing 51.9 percent of the vote. Prime Minister David Cameron, a "remain" proponent, announced on Friday that he would resign by October. No immediate successor is lined up, so it appeared the country could become rudderless.

The British currency traded at around $1.320 at 12:10 a.m. London time on Monday, below the 31-year low of $1.3224 reached on Friday.

"No political stability was seen over the weekend," Anthony Darvall, chief market strategist at spread-betting firm easyMarkets, said in a note Monday morning.

"Indeed, more uncertainty was evident as talks of a Scottish referendum and potential Scottish block of the U.K. leave vote is clouding the way forward. European officials have been keen to see the U.K. leave quickly to limit the disturbance to the euro zone."

Others suggested that any light at the end of the tunnel was probably a train.

People walk over Westminster Bridge wrapped in Union flags, towards the Queen Elizabeth Tower (Big Ben) and The Houses of Parliament in central London on June 26, 2016.
Odd Andersen | AFP | Getty Images
People walk over Westminster Bridge wrapped in Union flags, towards the Queen Elizabeth Tower (Big Ben) and The Houses of Parliament in central London on June 26, 2016.

"Britain needs to invoke Article 50 to redefine its relationship with the EU but leaders of the leave campaign refuse to act quickly. The longer they wait, the worse it will be for sterling," Kathy Lien, managing director for currency strategy at BK Asset Management, said in a note Friday.

She expected the pound would drop to $1.32 again, possibly as soon as this week.

Analysts had spent the time since the referendum results were released on Friday slashing their forecasts for sterling.

Swiss wealth manager Pictet, which had around $443 billion in assets under management at the end of March, said it now expected the pound to eventually stabilize in a $1.25-$1.35 range.

Others were more pessimistic.

Singapore bank DBS warned, "it is premature to conclude that the worst is over," adding that its worst-case scenario was for the pound to fall 10-20 percent on a trade-weighted basis. That implied the pound could fall to $1.15-$1.25, and could even "overshoot" to as far as $1.05, DBS said.

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Analysts largely agreed that this was just the beginning of the pound's fall.

"The market was not prepared for this Brexit vote. The way it traded the last couple weeks up through Thursday or early Friday, was that the vote would be for remain and risk assets were quite strong," Patrick Bennett, foreign exchange strategist at Canada-based bank CIBC, told CNBC's "Squawk Box."

He predicted two rounds of moves in the pound: first to unwind the remain optimism and then to price in the long-term effects of a Brexit. He forecast the pound could fall as low as $1.15 in the next couple months.

Safe-haven flows spurred the U.S. dollar higher, with the dollar index, which measures the greenback against a basket of currencies, surging as high as 96.268 overnight, from levels under 94 before the referendum's results.

The dollar's gains weighed on China's currency.

The People's Bank of China (PBOC) set the midpoint of its trading band for the yuan against the dollar at 6.6375, a five-and-a-half year low for the yuan, compared with Friday's 6.5776, suggesting authorities wanted the mainland's currency to weaken. The PBOC allows the yuan spot rate to rise or fall a maximum of 2 percent from the midpoint in daily trade.

Early on Monday, the U.S. dollar fetched 6.644 yuan in the onshore spot market, compared with as much as 6.5675 yuan on Thursday, before the referendum's results.

Although the Chinese currency was pegged to a trade-weighted basket of currencies last year, traders continued to place more focus on the dollar-yuan exchange rate.

Nomura said in a note Friday that it expected the Brexit will spur depreciation in the yuan against the U.S. dollar.

"The increased uncertainty triggered by the Brexit will arouse investors' risk-aversion sentiment and lead to capital outflows from China and other emerging economies," it said.

Additionally, "as the decision will drag euro and pound lower, the renminbi may need to depreciate against U.S. dollar if policymakers decide they do not want to see too much appreciation of renminbi against the trade-weighted basket," it said, but it added that it didn't expect an aggressive devaluation in the Chinese currency.

Some expected the PBOC will continue to step in this week.

Li Daokui, a professor of economics at Tsinghua University and a former PBOC advisor, told CNBC's "Squawk Box" that the central bank is balancing two goals: One is to let the exchange rate float with the market without over-intervening and the other is to stabilize the exchange rate and market expectations.

"I think the second consideration, which is to provide stability to the world exchange rate market, will play a more important role in the coming trading session, through the end of this week," Li said.

Whither the yen?

Japanese yen
John Phillips | Digital Editor for CNBC.com
Japanese yen

Another haven currency, the yen, stabilized somewhat after it climbed precipitously on Friday in the wake of the referendum results, with the dollar fetching as little as 99.08 yen at one point, marking the greenback's weakest against the Japanese currency since 2013.

Early on Monday, the dollar fetched 101.70 yen, off an earlier high of 102.46 yen. That's also down from the dollar/yen currency pair's 106.81 before the Brexit results on Friday, when the remain camp had appeared to be headed for a win.

It's also well below levels above 121 touched just before the Bank of Japan surprised markets on January 29 by introducing a negative interest rate policy.

The yen may appreciate even further, according to some analysts.

Eisuke Sakakibara, a professor at Aoyama Gakuin University and a former finance ministry official known as "Mr. Yen" for successful intervention in the yen in the 1990s, is among them.

"I think it will probably try 100 again within the matter of the next couple of days. It could break 100 and head toward 98-99," he told CNBC's "Street Signs," citing the safe-haven flows into the currency.

Sakakibara said that the government may intervene to weaken the yen if the currency pair headed toward 95 as at that level the U.S. authorities may agree to Japanese policymakers stepping into the market.

So far, Japan has refrained from directly intervening in the yen, which would contravene agreements with its Group of 7 partners to avoid unilateral action in the currency market.

—With contribution from CNBC's Katy Barnato.